Official Urges Greater Accountability by Euro Members

BRUSSELS — Olli Rehn, the European commissioner in charge of the euro, defended the bloc’s austerity policies on Friday and urged legislators to pass a law that would let him push countries even harder to shore up their finances.

Signaling little letup in the need for wrenching adjustments in Europe, Mr. Rehn also issued warnings to a wide range of countries, including some with the region’s largest economies, to keep to the reform path and contribute to overall growth.

France and Finland need to address their declining competitiveness while Germany should do more to open up its services market, Mr. Rehn said at a meeting organized by the European Policy Center, a research group.

Cyprus, which is negotiating a European bailout, needs to ease suspicions that its financial sector is a hub for money laundering, he said.

Mr. Rehn acknowledged the value of recent studies by economists at the International Monetary Fund suggesting that the damage created by austerity was up to three times more severe than previously thought. But Mr. Rehn also warned that those studies might not take sufficient account of the need to restore faith in countries blocked from borrowing money on international markets.

“We have not only the quantifiable effect, which is something that the economists like to emphasize, but we also have the confidence effect,” Mr. Rehn said.

“What would have happened if Italy would have loosened its fiscal policy in November 2011?” he asked, referring to a period when Italy’s borrowing costs were rising. That situation threatened “both an economic crisis and political dead end,” but recent overhauls and belt-tightening had helped Italy’s economy to stabilize, he said.

Mr. Rehn said efforts were under way among the European Commission, the I.M.F. and the European Central Bank to reach a consensus on the effects of austerity policies.

He also highlighted evidence showing that public debt levels in excess of 90 percent of gross domestic product — the level in many parts of Europe — undermine the dynamism of economies and cause them to experience low growth for many years.

Underscoring the plight of Cyprus, the ratings agency Moody’s Investors Service on Friday cut its rating on the country’s debt by three notches because of the capital needs of its banks, which were hurt by an earlier debt write-down in Greece. Cypriot banks had invested heavily in Greek bonds, in large part to make use of money that had flooded into the banks by Russian depositors seeking a nonruble haven.

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Olli Rehn urged legislators to pass a law that would let him push euro zone countries even harder to shore up their finances.CreditGeorges Gobet/Agence France-Presse — Getty Images

In a sign of how difficult it will be to help Cyprus out of its financial black hole, Mr. Rehn gave no indications of when an assistance package would be finished. That package was still “very much a work in progress,” he said, and any decision would be made “in due course.”

Cyprus still needs to adopt “new laws against money laundering” as a precondition for aid, he said. Once “Cyprus reforms its financial sector in line with European principles, we will work alongside Cyprus as we did in Spain,” Mr. Rehn said. He was apparently referring to an agreement reached last year with the government in Madrid to extend tens of billions of euros in loans to restructure and recapitalize its banking sector.

Chancellor Angela Merkel of Germany traveled to Cyprus on Friday for a meeting of conservative European leaders, including Nicos Anastasiades, head of the center-right DISY party, who is considered the favorite in Cypriot elections next month.

Parliamentary elections will also be held in Germany in September, which could make it more difficult for Ms. Merkel’s center-right government to win support from opposition parties for another bailout of a euro zone partner. German lawmakers must approve their country’s participation in any euro zone financial packages.

Part of the difficulty is linked to German doubts about Cypriots’ level of commitment to overhauling their financial system. Ms. Merkel emphasized Friday the importance of carrying out structural changes before a bailout could go ahead.

“The task is on the one hand carrying out reforms, and on the other hand to discuss solidarity,” Ms. Merkel said, the DPA news agency reported.

Mr. Rehn, in Brussels, also urged members of the European Parliament to speed up an agreement on fiscal legislation.

Those rules would require member states to present their public finance plans to the European Commission in greater detail, and sooner, than is required now. The commission could then demand revisions, as deemed necessary. For member states that are already in financial trouble, those rules would let the commission conduct regularly scheduled reviews and require more information about a country’s financial sector than is currently the case.

The rules would give “stronger possibilities of pre-emptive oversight as to national budgets before they are finally presented to national Parliaments” in order “to ensure that the member states practice what they preach,” Mr. Rehn said.

Failing to pass the law, he said, could invite a rerun of events in the middle of the last decade, when Germany and France essentially ignored their deficit-cap provisions, contributing to the current debt crisis in Europe.

“It’s a very serious issue,” he said.

Melissa Eddy contributed reporting from Berlin.

A version of this article appears in print on , Section B, Page 6 of the New York edition with the headline: Commissioner of the Euro Warns That Austerity Policies Must Continue. Order Reprints | Today’s Paper | Subscribe